Stock prices under pressure: how tax and interest rates drive returns at the turn of the tax year

Johnny Kang, Tapio Pekkala, Christopher Polk and Ruy Ribeiro

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We show that the level of interest rates determines the magnitude of mispricing at the turn of the tax year, as investors face the trade-o¤ between selling a temporarily depressed stock this year and selling next year, but delaying tax implications by one year. Interest rates do explain the predictable variation in US returns and selling behaviour around the turn of the year. Similar results in the UK provide out-of-sample confirmation, as tax and calendar years di¤er. Moreover, part of the variation in the risks and abnormal returns of size, value, and momentum factors can be linked to tax-motivated trading.

Keywords: tax-loss harvesting; January e¤ect; downward-sloping demand curves (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-02-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/43096/ Open access version. (application/pdf)

Related works:
Working Paper: Stock prices under pressure; How tax and interest rates drive returns at the turn of the tax year (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:43096

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